By July 1997, twenty years of events had placed capitalism in a uniquely triumphant position in its history: starting with Chinese reforms in 1978, feeding off the Soviet collapse and buoyed by the seeming triumph of the emerging SE Asian economies. ​ Self-congratulation at the flawless management of capitalist economies had returned --- just as on the eve of 1970s stagflation,​ economic journals were asking, 'Is the business cycle obsolete?'​ so too, in 1997, Foreign Affairs published an article titled 'The end of the business cycle?'​

By July 1997, twenty years of events had placed capitalism in a uniquely triumphant position in its history: starting with Chinese reforms in 1978, feeding off the Soviet collapse and buoyed by the seeming triumph of the emerging SE Asian economies. ​ Self-congratulation at the flawless management of capitalist economies had returned --- just as on the eve of 1970s stagflation,​ economic journals were asking, 'Is the business cycle obsolete?'​ so too, in 1997, Foreign Affairs published an article titled 'The end of the business cycle?'​

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Premature, perhaps, but it is important to have a working model of why depressions happen. ​ Krugman uses the Sweeneys'​ baby-sitting cooperative as his starting point, modelling a depression as a failure of demand, perhaps caused by a scarcity of money. ​ The most important conclusion to be drawn from this model is: bad things happen to good economies --- no inherent weakness in the baby-sitting economy lead to its failure of demand, and so it is not advisable to assert that simply because an economy is in good, robust shape, that it is now immune from depressions.

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Premature, perhaps, but it is important to have a working model of why depressions happen. ​ Krugman uses the Sweeneys'​ baby-sitting cooperative as his starting point, modelling a depression as a failure of demand, perhaps caused by a scarcity of money. ​ The most important conclusion to be drawn from this model is: //bad things happen to good economies// --- no inherent weakness in the baby-sitting economy lead to its failure of demand, and so it is not advisable to assert that simply because an economy is in good, robust shape, that it is now immune from depressions.

Before World War II the role of demand management simply was not understood; from the War to the end of the sixties, the principles of Keynesian demand management seemed to be successfully adopted. In the 1970s Vietnam and the oil shocks proved that not all economic circumstances were easily manageable but by the 1980s it seemed that for the most part such management --- even if only through monetary mechanisms --- was proving successful. ​ In 1987 the stock market crashed, losing as much value in the crash'​s first day as was lost in the first day of 1929 --- but the Fed responded quickly, pumping cash into the system and there was very little impact on the real economy. ​ By 1997, then, it did appear that even if the business cycle was not eliminated it might at least have been decisively tamed.

Before World War II the role of demand management simply was not understood; from the War to the end of the sixties, the principles of Keynesian demand management seemed to be successfully adopted. In the 1970s Vietnam and the oil shocks proved that not all economic circumstances were easily manageable but by the 1980s it seemed that for the most part such management --- even if only through monetary mechanisms --- was proving successful. ​ In 1987 the stock market crashed, losing as much value in the crash'​s first day as was lost in the first day of 1929 --- but the Fed responded quickly, pumping cash into the system and there was very little impact on the real economy. ​ By 1997, then, it did appear that even if the business cycle was not eliminated it might at least have been decisively tamed.

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The advent of information technology was clearly having an impact on at least the perception of capitalism, even if the real value for the economy was being overrated --- for the first time in a generation, certain markets were being dominated by intrepid entrepreneurs rather than staid corporations,​ and the IT revolution had an enormously visible impact on the environment in which most in the West worked: the landscape of the typical office. ​ And the first beneficiaries of globalisation --- the SE Asian economies --- were now reaping enough unquestionable success to provide ample ammunition to those who argued that a globalised, export-led development path was the decisive means to escape poverty. ​ There were problems: Japan had still not recovered from a recession that had begun in the early nineties, Europe was finding it difficult to force unemployment down as far as it would like, particularly amongst its young and even during recoveries, critics of capitalism pointed to those remaining in extreme poverty in the US and the working conditions of the poorest industrial workers in the developing economies --- and the vast swathes in Africa and South Asia who were still untouched by this new growth.

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The advent of information technology was clearly having an impact on at least the //perception// of capitalism, even if the real value for the economy was being overrated --- for the first time in a generation, certain markets were being dominated by intrepid entrepreneurs rather than staid corporations,​ and the IT revolution had an enormously visible impact on the environment in which most in the West worked: the landscape of the typical office. ​ And the first beneficiaries of globalisation --- the SE Asian economies --- were now reaping enough unquestionable success to provide ample ammunition to those who argued that a globalised, export-led development path was the decisive means to escape poverty. ​ There were problems: Japan had still not recovered from a recession that had begun in the early nineties, Europe was finding it difficult to force unemployment down as far as it would like, particularly amongst its young and even during recoveries, critics of capitalism pointed to those remaining in extreme poverty in the US and the working conditions of the poorest industrial workers in the developing economies --- and the vast swathes in Africa and South Asia who were still untouched by this new growth.

> But the prospects for the world economy in general, and for capitalism in particular, seemed better than they had been in living memory, better than anyone could have imagined a decade or two earlier.

> But the prospects for the world economy in general, and for capitalism in particular, seemed better than they had been in living memory, better than anyone could have imagined a decade or two earlier.

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Whether an 'Asian system'​ really existed is a moot point. ​ These economies, although highly diverse in ethnicity, religion and other social factors, nevertheless displayed economic similarities,​ particularly high savings rates, and very good basic education leading to high literacy and numeracy --- and this accumulation of physical and human capital in turn formed the basis for their growth. ​ But it is less clear whether other features of the 'Asian system'​ --- particularly the close association of business and the state, in which the state protected new industries and provided subsidised credit and generally actively involved itself in economic development was crucial to the Asian modality of economic development or not. This relationship between the state and private sector was given a lot of credit for the successes by some observers, and much of the blame for the crash by others, when it would come to be dubbed 'crony capitalism'​. ​ We should be sceptical of both sets of claims.

Whether an 'Asian system'​ really existed is a moot point. ​ These economies, although highly diverse in ethnicity, religion and other social factors, nevertheless displayed economic similarities,​ particularly high savings rates, and very good basic education leading to high literacy and numeracy --- and this accumulation of physical and human capital in turn formed the basis for their growth. ​ But it is less clear whether other features of the 'Asian system'​ --- particularly the close association of business and the state, in which the state protected new industries and provided subsidised credit and generally actively involved itself in economic development was crucial to the Asian modality of economic development or not. This relationship between the state and private sector was given a lot of credit for the successes by some observers, and much of the blame for the crash by others, when it would come to be dubbed 'crony capitalism'​. ​ We should be sceptical of both sets of claims.

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====== Warning Ignored: Latin America, 1995 ======

====== Warning Ignored: Latin America, 1995 ======

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Both rules were broken: the peso was devalued 15 per cent, only half of the adjustment most observers called for, and anti-investor rhetoric did not reassure the investor community. ​ The government was ultimately unable to support the peg, and the peso ultimately lost half of its value. ​ Interest rates were soaring and government debt --- dollarised as a means of restoring confidence in the peso --- was inflated by the devaluation and had a serious impact on the budget. ​ Against Congress'​ wishes, the Treasury found an obscure fund designed as a means of supporting the dollar from which it withdrew $50 billion to support the peso and, with a lot of luck, this was sufficient to bring the crisis under control.

Both rules were broken: the peso was devalued 15 per cent, only half of the adjustment most observers called for, and anti-investor rhetoric did not reassure the investor community. ​ The government was ultimately unable to support the peg, and the peso ultimately lost half of its value. ​ Interest rates were soaring and government debt --- dollarised as a means of restoring confidence in the peso --- was inflated by the devaluation and had a serious impact on the budget. ​ Against Congress'​ wishes, the Treasury found an obscure fund designed as a means of supporting the dollar from which it withdrew $50 billion to support the peso and, with a lot of luck, this was sufficient to bring the crisis under control.

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Argentina had a more convoluted history. ​ Benefiting from a good British-build and funded rail network, before the First World War it was a rich economy built on agriculture and beef exports, but as with other export-oriented economies it was hit hard by the Depression. ​ It adopted a heterodox policy response faster than most, though, and printed its way out of crisis more rapidly than Europe and the US. Unfortunately,​ the legacy of heterodox successes before the Second World War left a legacy of rather inconsistent monetary policy and recurrent inflations. ​ The debt crisis hit hard in 1982 at the same time as the Falklands debacle, and an attempt to institute a new, more stable currency ended in a disastrous hyperinflation of 3000 per cent. In 1989 a reformist government took office and made substantial changes. ​ The always-successful beef and agriculture sectors had long effectively subsidised the rest of a hideously inefficient economy; tariffs were slashed. ​ The government attempted to permanently stabilise the currency by resurrecting the traditional colonial concept of a currency board --- a particularly hard form of peg in which every peso in circulation was backed by government dollar reserves, with a government guarantee to support an exchange rate of 1:1. Output leapt by 25 per cent over the next three years.

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Argentina had a more convoluted history. ​ Benefiting from a good British-built and -funded rail network, before the First World War it was a rich economy built on agriculture and beef exports, but as with other export-oriented economies it was hit hard by the Depression. ​ It adopted a heterodox policy response faster than most, though, and printed its way out of crisis more rapidly than Europe and the US. Unfortunately,​ the legacy of heterodox successes before the Second World War left a legacy of rather inconsistent monetary policy and recurrent inflations. ​ The debt crisis hit hard in 1982 at the same time as the Falklands debacle, and an attempt to institute a new, more stable currency ended in a disastrous hyperinflation of 3000 per cent. In 1989 a reformist government took office and made substantial changes. ​ The always-successful beef and agriculture sectors had long effectively subsidised the rest of a hideously inefficient economy; tariffs were slashed. ​ The government attempted to permanently stabilise the currency by resurrecting the traditional colonial concept of a currency board --- a particularly hard form of peg in which every peso in circulation was backed by government dollar reserves, with a government guarantee to support an exchange rate of 1:1. Output leapt by 25 per cent over the next three years.

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The Mexican crisis had a perhaps irrational knock-on effect on Argentina. ​ Foreign debts were called in --- perhaps by American banks that couldn'​t be bothered to distinguish between one Latin American company and another. ​ The currency board system, highly robust to speculative attack suddenly revealed another kind of weakness --- that the central bank could not extend the money supply without increasing its foreign reserves. ​ The calling in of foreign loans forced the Argentine money supply to contract instead --- and there was nothing the government or banking system could do to prevent it. Credit for businesses was insufficient and bankruptcies ensued. ​ Lacking faith in the banking system, depositors rushed to withdraw and dollarise their accounts. ​ The currency board system effectively made it impossible for the government/​central bank to act as the lender of last resort --- it was no more able to print pesos than it could print gold, at least without abandoning the currency board. ​ It desperately needed dollars, which came, luckily enough, in the form of $12Â billion from the World Bank. The contraction in both economies was severe --- bigger than that in the first year of the 1982 crisis, but the rescues worked and the crisis was surprisingly short, and both economies recovered their strength quickly.

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The Mexican crisis had a perhaps irrational knock-on effect on Argentina. ​ Foreign debts were called in --- perhaps by American banks that couldn'​t be bothered to distinguish between one Latin American company and another. ​ The currency board system, highly robust to speculative attack suddenly revealed another kind of weakness --- that the central bank could not extend the money supply without increasing its foreign reserves. ​ The calling in of foreign loans forced the Argentine money supply to contract instead --- and there was nothing the government or banking system could do to prevent it. Credit for businesses was insufficient and bankruptcies ensued. ​ Lacking faith in the banking system, depositors rushed to withdraw and dollarise their accounts. ​ The currency board system effectively made it impossible for the government/​central bank to act as the lender of last resort --- it was no more able to print pesos than it could print gold, at least without abandoning the currency board. ​ It desperately needed dollars, which came, luckily enough, in the form of $12 billion from the World Bank. The contraction in both economies was severe --- bigger than that in the first year of the 1982 crisis, but the rescues worked and the crisis was surprisingly short, and both economies recovered their strength quickly.

Unfortunately,​ the lessons drawn from the experience were the wrong ones. It was supposed that this was a particularly Latin American crisis, a consequence of the peculiar Mexican system, and there were no wider implications. ​ Moreover, the American rescue had been a meteoric success, supposedly proving the renewed insight and power of clever economists to control whatever crises could now be thrown at them.

Unfortunately,​ the lessons drawn from the experience were the wrong ones. It was supposed that this was a particularly Latin American crisis, a consequence of the peculiar Mexican system, and there were no wider implications. ​ Moreover, the American rescue had been a meteoric success, supposedly proving the renewed insight and power of clever economists to control whatever crises could now be thrown at them.

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These were the wrong lessons. ​ It was not appreciated that the errors in Mexican policy-making,​ although real, were out of all proportion to the scale of the crisis --- it seemed like an exceptionally severe punishment for such misdemeanours. ​ Moreover, the rescue had been achieved primarily by a sleight of hand by the Treasury over Congress'​ disapproval --- hardly an indication that a robust international system was working. ​ And in the Mexican case the political relationship was easily managed --- the US was particularly anxious to assist an economy which is too close to the US for America ​to see fail, and Mexican politicians were not above asking for help from Washington and accepting a little policy direction. ​ Perhaps above all, there was a failure to understand just how lucky the rescue package had been in the effect that it had had --- in truth there was little genuine reason to believe that intelligent policy intervention had been a more decisive factor than dumb luck in getting things back on track.

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These were the wrong lessons. ​ It was not appreciated that the errors in Mexican policy-making,​ although real, were out of all proportion to the scale of the crisis --- it seemed like an exceptionally severe punishment for such misdemeanours. ​ Moreover, the rescue had been achieved primarily by a sleight of hand by the Treasury over Congress'​ disapproval --- hardly an indication that a robust international system was working. ​ And in the Mexican case the political relationship was easily managed --- the US was particularly anxious to assist an economy which is too close to its borders to be allowed ​to fail, and Mexican politicians were not above asking for help from Washington and accepting a little policy direction. ​ Perhaps above all, there was a failure to understand just how lucky the rescue package had been in the effect that it had had --- in truth there was little genuine reason to believe that intelligent policy intervention had been a more decisive factor than dumb luck in getting things back on track.

====== The Future That Didn't Work: Japan in the 1990s ======

====== The Future That Didn't Work: Japan in the 1990s ======

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Japan'​s economy was very successful in the period 1953-73, growing at around 9 per cent per annum, the most rapid sustained industrial growth that had then been recorded, even faster than the early years of Stalinism. ​ This success didn't really gain attention from the West until it was already decaying; from 1973 onwards growth slowed suddenly --- at the same time as it did throughout much of the world --- to around 4 per cent. Although debate on Japan'​s success was not particularly timely, it was extensive. ​ Opinion divided into two main camps:

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Japan'​s economy was very successful in the period 1953--73, growing at around 9 per cent per annum, the most rapid sustained industrial growth that had then been recorded, even faster than the early years of Stalinism. ​ This success didn't really gain attention from the West until it was already decaying; from 1973 onwards growth slowed suddenly --- at the same time as it did throughout much of the world --- to around 4 per cent. Although debate on Japan'​s success was not particularly timely, it was extensive. ​ Opinion divided into two main camps:

- Those who believed that Japan'​s successes could be explained by classical economic theory --- that what had happened essentially boiled down to '​getting economic fundamentals right',​ and

- Those who believed that Japan'​s successes could be explained by classical economic theory --- that what had happened essentially boiled down to '​getting economic fundamentals right',​ and